ECONOMY 15

DISINVESTMENT
Disinvestment refers to selling of equity of a PSU to a private sector companies, financial institutions, general
public or workers
Disinvestment versus Privatisation
Disinvestment refers to selling of equity of a PSU to a private organization or to general public.
Privatisation refers to providing for larger role for private capital and enterprise in the
functioning of an economy.
Privatisation is a wider term than disinvestment. Disinvestment is one of the means for
achieving privatization.
Privatisation may result from any of the following:o Disinvestment
o Denationalisation (i.e., complete sell off of a PSU)
o Transfer of management and control of a PSU to the private sector
o Dereservation of areas reserved for the public Sector etc.
Objectives of Disinvestment
To transfer the resources from non-strategic sector to the strategic sector, which is much higher
on social priority such as basic health, family welfare, primary education etc.
To raise funds to cover up the fiscal deficit of the government.
To improve efficiency of the public sector by inducing private initiative and competition.
To enhance accountability of the PSUs by exposing them to the capital market.
To reduce political interference by imparting market orientation to the enterprise.
Bring down Government equity in all non-strategic PSUs to 26 % or lower, if necessary.
Restructure and revive potentially- viable PSUs
Close down PSUs which cannot be revived
Fully protect the interest of workers.
The Disinvestment Process
In 1992, Government constituted a committee on the Disinvestment of shares in PSEs headed
by Dr. C. Rangarajan to recommend over the policy of disinvestment.
The committee recommended that upto 49% equity of the PSUs under the exclusive
participation of the state could be disinvested but for rest of the industries disinvestment can
be allowed upto 74%.
Further, the government constituted a five member Disinvestment Commission under the
chairmanship of Shri G.V. Ramakrishnan in August 1996 to draw up a comprehensive policy for
the long term disinvestment programme.
The commission was mandated to advise the government on the extent, methodology, strategy
and timing of disinvestment.
In May 2004, the Government adopted National Common Minimum Programme, which
outlined the policy of the Government with respect to the Public Sector.
General, profit making PSUs will not be privatized.
In case of privatization of profitable PSUs government will retain atleast 51% of the
equity and the management control of the enterprise.
Navratna PSU will be retained under the public sector.
Chronically loss-making companies will be either sold-off or closed, after all workers get
their legitimate dues and compensation.

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All privatisations will be considered on a transparent and consultative case-by-case,

basis.
A board for Reconstruction of Public Sector Enterprises (BRPSE) to be constituted.
A National Investment Fund will be established.
On 25 November 2005, the Government decided, in principle, to list large, profitable CPSEs on
domestic stock exchanges and to selectively sell small portions of equity in listed, profitable
CPSEs (other than the Navratnas).
The target for disinvestment is Rs 40,000 crore every year. But due to the financial crisis
government is not able to meet its targets. The targets have now been reduced to Rs. 30,000
crore.
SMALL SCALE & COTTAGE INDUSTRIES
Small Scale Industries are industries in which the investment limit is upto certain limit which was 1
crore initially 1 crore and now has been increased to 5 crore
Cottage Industries are usually very small and are established in cottages or dwelling places.
In Small scale industry outside labour is used whereas in cottage industries family labour is used.
SSI uses both modern and traditional techniques. Cottage industries depend on traditional
techniques of production.
New Definitions of Micro, Small & Medium Enterprises
In accordance with the provision of Micro, Small & Medium Enterprises Development (MSMED) Act,
2006 the Micro, Small and Medium Enterprises (MSME) are classified in two Classes:
o Manufacturing Enterprises: The enterprises engaged in the manufacture or production of
goods pertaining to any industry specified in the first schedule to the industries
(Development and regulation) Act, 1951). The Manufacturing Enterprise is defined in terms
of investment in Plant & Machinery.
o Service Enterprises: The enterprises engaged in providing or rendering of services and are
defined in terms of investment in equipment:
Manufacturing Sector
Enterprises

Micro Enterprises
Small Enterprises
Medium Enterprises

Investment in plant & machinery

Does not exceed twenty five lakh rupees
More than twenty five lakh rupees but does not exceed
five crore rupees
More than five crore rupees but does not exceed
ten crore rupees

Service Sector
Enterprises

Micro Enterprises
Small Enterprises
Medium Enterprises

Investment in equipment
Does not exceed ten lakh rupees:
More than ten lakh rupees but does not exceed two
crore rupees
More than two crore rupees but does not exceed five
core rupees

Contribution of Small Scale Industries

Small enterprise sector provided employment to about 225 lack people during 2008-09. The small
scale sector accounts for over 80% of the manufacturing sector's employment.
It contributed significantly towards the economic growth of the nation, with over 39% of the
industrial production.
The small-scale accounts for over 34% of the total exports and about 45% of the manufacturing
exports. Further over 90% of exports of the SSIs consists of non-traditional items like sports goods,
readymade garments, processed foods, chemicals etc.

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SSIs are conducive for the economic development of underdeveloped countries like India. Such
industries are relatively labour intensive so they make economical use of the scarce capital.
Small scale industries are instrumental in reducing the inequalities in wealth. In these
industries capital is widely distributed in small quantities and the surplus of these industries is
distributed among large number of people.
Small scale industries bring about regional dispersal of industries and alleviate regional imbalances.
Small-scale industries make use of local resources including the capital and entrepreneurial skills
which would have remained unused for want of such industries.
Small industry sector has performed exceedingly well and enabled the country to achieve a wide
measure of industrial growth and diversification.
In these industries relations between employers and employees are direct and cordial. There is
hardly any scope of exploitation of labour and industrial disputes.

Government
industries.

measures

to

promote

small

scale

(a) Organisational measures

Establishment of Boards
National Small Industries Corporation (NSIC)
Industrial Estates
District Industries Centre (DIC)

Problems of Cottage and Small-Scale Industries

1. Non-availability of timely and adequate
credit.
2. Inefficient management
3. Lack of infrastructure
4. Technological obsolescence
5. Limited availability of raw materials
6. Marketing problems
7. Competition with large-scale industries and
imports.
8. Excessive burden of local taxes,
9. Widespread sickness.

(b) Financial measures

Small Industries Development Fund (SIDF) - set
up in 1986 to provide refinance (i.e. finance to
the financial institutions in lieu of their
lending to SSIs) assistance for development,
expansion, modernization, rehabilitation of SSIs.
National Equity Fund (NEF)
Single Window Scheme (SWS)
Small Industries Development Bank of India (SIDBI):lt was established in October, 1989 by
amalgamation of small Industries Development Fund (SIDF) and Natural Equity Fund (NEF)

(c) Fiscal Measures

Small-scale enterprises having turnover, upto 1 crore are fully exempted from the excise duty.
Concessional rate of custom duties are levied on import of certain kind of raw materials and
components used by SSIs.
Price and purchase preference is granted to products manufactured in the small-scale sector in
government purchase programme.
(d) Technical assistance
Small-scale Industries Development Organisation (SIDO):It was established in 1954. SIDO
provides technical, managerial, economic and marketing assistance to SSIs through its network of
extension centres and service institutes.
Council for Advancement of Rural Technology (CART):It was established in 1982 to provide
technical assistance to rural industries.
Technology Development and Modernisation Fund (TDMF):It was set up for the technological
upgradation and modernization of the export oriented units.

ECONOMY 15

(e) Reservation of items for SSIs

The policy to reserve certain items for the small-scale sector was introduced in 1967.
It aims to promote the SSIs by protecting them from competition with the large-scale units. In April
1967 there were only items in the reserved category which were increased in several phases to 873
in 1984.
The policy of reservation was widely criticized by a number of economists because it adversely
affected the production and productivity of the reserved items. So, government appointed the
Abid Hussain Committee to review the policy of reservation of items for the SSIs.
The committee gave its report in 1997 with the observation that the policy of reservation has
actually reduced the competitiveness of the SSIs engaged in the production of such items.
Only a few SSIs were involved in the production of the reserved items and their output was almost
negligible in comparison of the total output of the SSIs. Thus, the committee recommended that
the policy of reservation of items for SSIs should be abandoned.
Government did not abandon the policy of reservation altogether; however government has
dereserved few items in the recent past. Government dereserved 79 items in February, 2008. The
total number of reserved items now stands at 35.
INDUSTRIAL SICKNESS
The government defined the industrial sickness for the first time in the Sick Industrial Companies (Special
Provisions) Act, 1985. According to this Act, a medium or large (i.e. non-SSI) company was defined as sick if:
(1) it was registered for atleast 7 years (later reduced to 5 years)
(2) it incurred cash losses in the current year and the preceding year.
(3) its entire net worth (i.e. paid-up capital and reserves) was eroded.
A company is regarded, as weak or incipiently sick on the erosion of 50% of its peak net worth during any of
preceding five financial years.
The industrial sickness has been redefined in the Companies (Second Amendment) Act, 2002.
Revival and rehabilitation measures
The government undertake the following measures to revive and rehabilitate the sick industrial units.
Financial Assistance
As per the directions of the RBI, the commercial banks granted the following concessions to sick
industrial units:
(a) Rescheduling of loans and interest:
(b) Grant of additional working capital:
(c)Waiving off interest on loans:
(d) Moratorium on payment of interest, etc.
Organisational measures
o State-level inter-institutional committees These are set up by the RBI to ensure better
coordination "between the banks, state governments and other concerned financial institutions.
o Special Cell: It was set up by the Rehabilitation Finance Division of the IDBI to provide
assistance to the banks for revival of sick units.
.
Fiscal Concessions
o The government amended the Income Tax Act in 1977 to provide tax benefit to those units
which take over the sick units for reviving them.
o The government announced a scheme for grant of excise loans to sick / weak units.
o Under this scheme, selected sick units are eligible for excise loans not exceeding 50% of the
excise duty actually paid over the preceding 5 years.